Stocks and bonds are both financial assets that individuals and institutions use to invest and raise capital.
Stocks, also known as shares or equities, represent ownership in a company. When an investor buys stocks, they are essentially buying a portion of the company and becoming a shareholder. Shareholders have ownership rights, such as the ability to vote on certain company matters and receive dividends, which are a distribution of the company's profits. The value of stocks can fluctuate based on various factors like company performance, market conditions, and investor sentiment. Investing in stocks carries a level of risk, as the investor's returns depend on the success and profitability of the company.
Bonds, on the other hand, are debt instruments issued by governments, municipalities, and corporations to raise capital. When an investor buys a bond, they are effectively lending money to the issuer for a fixed period. In return, the issuer promises to pay periodic interest payments, known as coupon payments, and return the principal amount when the bond matures. Bonds are generally considered less risky than stocks, as they offer fixed income and are backed by the issuer's ability to repay the debt. However, bond prices can still fluctuate based on changes in interest rates and credit ratings.
Both stocks and bonds provide opportunities for investors to build a diversified portfolio and generate income or capital gains. They offer different risk-return profiles, with stocks generally associated with higher potential returns but higher volatility, and bonds providing more stable income streams and relatively lower risk.
